GDP Is Bogus: Here's Why

Of Two Minds ^ | 10/19/2017 | Charles Hugh Smith

[SeekAndFind]

The rot eating away at our society and economy is typically papered over with bogus statistics that "prove" everything's getting better every day in every way. The prime "proof" of rising prosperity is the Gross Domestic Product (GDP), which never fails to loft higher, with the rare excepts being Spots of Bother (recessions) that never last more than a quarter or two.

Longtime correspondent Dave P. of Market Daily Briefing recently summarized the key flaw in GDP: GDP doesn't reflect changes in the balance sheet, i.e. debt.

So if we borrow money to pay people to dig holes and then fill them with the excavated dirt, GDP rises to general applause. The debt we took on to fund the make-work isn't accounted for at all.

Here's Dave's explanation:

Once I learned about accounting, I figured out why the GDP metric wasn't sufficient. What is missing?

The balance sheet.

Hurricanes are a direct hit to your nation's balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased.

We know this because we use the balance sheet equation: equity = assets - liabilities. Equity is another word for wealth.

Before hurricane:

wealth = (house + car) - (home debt + car debt)

After hurricane, you rebuild your house, and buy a new car, using borrowed money:

wealth = (house + car) - (2 x home debt + 2 x car debt)

Wealth (equity) has declined by the sum (home debt + car debt)

So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually matter; that equity is just gone. Destruction is always a downside for equity - even if there is a temporary positive impact on the income statement.

Isn't it interesting that the mainstream economists, who don't use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks?

Thank you, Dave, for an explanation we never see in the mainstream. And here's a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation:

[TBP]

Part of it is inflation. As long as you measure wealth in money, you’re going to have an artificially increasing amount of wealth, even if you’re not as really wealthy as you were in terms of actual standard of living.

For example, let’s say that your GDP is 10 trillion dollars. Let’s say rampant inflation pushes it up to 15 trillion dollars, but also eats at the ability of producers to hire and to produce and sell product. So you really only have 8 or 9 trillion in power, compared to teh 10 trillion you had earlier. but it’s listed as 15 trillion because they produced more of the commodity called dollars and thus reduced their value.

The thing to measure is real wealth, but measuring by dollars is quicker and easier — and more advantageous for teh political class.

[dadfly]

bookmark

[Fiddlstix]

Bookmark

[buffaloguy]

GDP is a measure of activity, not a measure of net worth.

It is not an everything number.

[ForYourChildren]

His questions overlayed on the chart are very misleading.

“Are you 35% better off than you were in 2000?”
“Are we 160% better off than we were in 1980?”

Notice the change in the words “we” to “you”.

I don’t have a problem with the word “we”. But the word “you” is very misleading.

The word “you” makes it seem individual. As in, “Am I, as an individual, 35% better off than in 2000?”

The GDP is not a measure of an individual growth, but as a collective whole. This makes the “you” dishonest.

The proper question was asked with the “we”: “Are we 160% better off than we were in 1980?”

In other words. Has society grown? Can my children find jobs? Can we support more immigration? If there was now growth in population, then possibly I could accept the “you”.

Use a company as an example: A company grows 200%. Did “you” as an employee see a 200% growth in your income? No! Did “we” as a company grow 200%? Yes!

So, I ask,

“Why did the author change the word from “we” to “you?”

Sensationalism I am guessing.

[ctdonath2]

“As long as you measure wealth in money, you’re going to have an artificially increasing amount of wealth”

Don’t confuse wealth with inflation.

Inflation, as economic policy, is important: done right, it maintains a consistent representation of wealth - even though more wealth is produced.

Currency divvies up national wealth into manageable representations.
(total wealth) / (total currency) = (value of $1).
As total wealth increases (more people doing & making more), you want the total currency to increase, keeping the recognized value of $1 consistent.
Some argue over benefits of more or less inflation than that; primary point is people expect $1 now holds roughly same value as $1 later (historically wrong, but that’s the idea).

GDP tries to measure the growth of total wealth in the only measure we have: number of $1 units available.

“The thing to measure is real wealth”

If you’ve got a way other than dollar-based currency units, speak up.

[Wayne07]

It’s a poorly constructed article, but does hit on a valid point which is GDP can be inflated by adding government spending that is just generating more debt.

[Ferndina]

He sounds foolish when he says other than spots of bother (recessions) which never last more than a quarter or two.

Since definition of recession is 2 consecutive quarters of negative gdp growth, I wonder if he is an idiot.

[Rockingham]

The author's point is mistaken. GDP is the current production of goods and services, much of which is financed in one respect or another, while national equity totals include debt as intangible wealth for the holders of that debt.

The larger point is whether the economy as a whole or in certain sectors is over-leveraged or under-leveraged. In practice, this is often measured by credit quality, default rates, and whether lenders and those who own loan portfolios have made adequate provision against possible loan losses or declines in credit value.

One should not fall into the trap of thinking that debt is always bad, or that debt instruments like bonds, notes, and mortgages are an illusory form of wealth. In a free market economy, prosperity almost inevitably involve greater borrowing, with the debt providing benefits to both debtors and lenders.

Above all, the availability of credit for worthy innovators, entrepreneurs, producers, and consumers helps the economy as a whole to develop and grow in size. To a remarkable degree, the modern American economy is willing to finance new good ideas. We all benefit from that.

[TBP]

Inflation does not produce any wealth.

Money is a commodity, just like all the things we buy with it. If you produce more of that commodity, you lower its value. But since money is of no use to anyone except as the means of exchange, you’re not producing any more wealth. It’s not like producing more cars or food or shoes.

Raising the number of dollars does not in any way increase wealth, nor does it have anything to do with how wealthy you are in other commodities.

If you want a constant dollar, just leave the money supply alone.

[ctdonath2]

If you want a constant dollar, you must scale currency supply with total wealth.

Currency units are the number of slices in the wealth pizza. If the pizza gets bigger, you increase the number of slices so each slice remains about the same size. You don’t contend that an extra-large pizza is the same size as a personal just because both are cut into 4 slices, you serve a larger population by cutting slices into the same sizes as a small pizza for a small population. As you make bigger pizzas, cut with same-size slices as before, you recognize that by growth in GDP (Gross Dimensions of Pizza).

Currency units don’t perfectly map to wealth, of course, but it’s the closest thing we’ve got (feel free to suggest something else). Add up the exchangeable value of everything that citizens/businesses produce each year, and you get GDP - which in turn is a decent reflection of the total value of society.

Not perfect equivalencies, of course, but enough to get the point across. GDP is not “bogus”, especially if you don’t have anything else to measure better.

[Boogieman]

Good point. For example, the price of gold has just about tripled in the last 30 years, which I think is a pretty good quick and dirty measure of “real inflation” (under most circumstances). On the other hand, GDP hasn’t quite doubled in that period.

So if you have twice the income nowadays, but each dollar buys only 1/3 of what it did, then your income is actually only 2/3 of what it was 30 years ago, all else being equal.

[TBP]

Precisely. Which makes GDP a lousy measure.

[mywholebodyisaweapon]

GDP is a Keynesian concept, conceived by Keynes’ disciples like Simon Kuznets.

It is biased toward demand, like most National Income Accounting, and counts only what can be seen. As Bastiat observed in 1850, the costs that are unseen are conveniently forgotten, like all the garbage hauled away after Katrina, Andrew, Harvey, etc. “Isn’t it just wonderful how replacing all that was lost in these storms boosted our economic well-being by positively contributing to GDP?”

The problem arises from ignoring the contribution of opportunity costs (negatively) to stocks of assets, but recognizing their contributions (positively) to flows. It isn’t easily remedied. GDP means something, just not as much as common parlance might imply.

We have to remember to tell these Keynesian economists like that Paul guy who shills for the Weather Channel that they are full of schadenfreude.

[aquila48]

Bookmark

[wastedyears]

Exactly

Basic accounting equation:

Assets = Liabilities + Owner’s Equity

What are the assets? What are the liabilities? What does the country have on hand?

I’d love to take an economics class...